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State Boards are vulnerable to antitrust attack under US Supreme Court ruling

The US Supreme Court Wednesday redefined the scope of federal antitrust immunity as applied to state regulatory boards. The Court’s 6–3 decision in North Carolina State Board of Dental Examiners v. FTC (Dental Examiners) ruled that a state professional board that is controlled by the profession that it regulates does not have antitrust immunity under the state-action doctrine unless it is actively supervised by state government officials. Antitrust practitioners have watched the case closely because of its potential for broad application to professional, trade, and industry groups that have been authorized by state governments to regulate the markets in which they compete, but are not closely supervised on how they do so.

The case arose out of North Carolina State Board of Dental Examiners’ efforts to block nondentists from offering cosmetic teeth-whitening services, in response to dentists’ complaints that nondentists were undercutting their prices for whitening services. Eight of the 10 board members were themselves dentists who offered teeth-whitening services. The board responded by issuing cease-and-desist letters to the nondentists threatening criminal liability, rather than taking actions that would have triggered oversight by state officials. The board’s threats succeeded in pushing the nondentists out of the North Carolina market for teeth whitening.

The FTC brought an administrative complaint charging the board with unreasonably restraining trade in violation of § 5 of the Federal Trade Commission Act. While the Supreme Court had previously established that certain nonstate actors, such as trade associations, were not shielded by the state-action immunity doctrine unless they were actively supervised by state government, it had never extended that principle to professional boards established by state law. In many places, such boards, while nominally state agencies, are composed of private practitioners active in the professions they regulate.

The Court has long recognized that a state’s antitrust immunity can extend to private entities through which a state exercises its sovereignty. But it distinguishes between such entities acting in their own self-interest and the implementation of a state’s policies that restrict competition in the public interest. To ensure that a state-sanctioned private entity does not cross this line, immunity attaches only to those restraints that the state articulates clearly and expresses affirmatively as state policy. In addition, the state must actively supervise the restrictive policy. According to the Court, these two requirements ensure that “States accept political accountability for anticompetitive conduct they permit and control.” The Court noted that because the North Carolina State Board of Dental Examiners was controlled by “active market participants,” the “need for supervision is manifest.”

The Court articulated three prerequisites for a finding of active state supervision. The state supervisor must: (1) review the substance of the anticompetitive decision, not merely the procedures followed to produce it; (2) have the power to veto or modify particular decisions to ensure that they accord with state policy; and (3) not itself be an active market participant. Noting that the adequacy of the supervision would also depend on the specific circumstances, the Court observed that fundamentally, “the question is whether the State’s review mechanisms provide realistic assurance that a nonsovereign actor’s anticompetitive conduct promotes state policy, rather than merely the party’s individual interest.”

As a result of the Supreme Court’s decision, it may be necessary for states to either revisit the supervision they impose on state professional boards, and more generally, state regulatory boards, or change the composition of those boards so that they are not controlled by “active market participants.” This raises a number of unresolved issues. The Court does not identify the characteristics of an “active market participant.” It remains unclear whether, for example, professionals are still “active” if they withdraw from the market temporarily during their term of service on a board. Nor does the Court address the scope of the required nexus between a board member’s commercial interests and the policy at issue. Would a board of dental examiners receive antitrust immunity if a majority of its members did not offer teeth-whitening services? As Justice Scalia comments in his dissent: “The answers to these questions are not obvious, but the States must predict the answers in order to make informed choices about how to constitute their agencies.” So too must those who agree to serve on such boards, understanding that an incorrect prediction may expose them to antitrust enforcement action.

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